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We know that the moving average is a very helpful indicator to predict or guess the next movements of the asset which direction the trend will take, with that said below is my assignment on the moving average.
1. Explain Your Understanding of Moving Average.
A moving average is an indicator that helps us to speculate or predict the next movements of an asset, because this indicator takes the data of the past and current trend and then determine what will happen if the next trend will be upward or downward.
The moving average has the function that we can observe beyond the price fluctuations of an asset, this is through the observation of the long-term trend.
In addition, the moving average is an indicator that can work with other indicators to have more accuracy in predicting the price actions of the asset, this will help us to choose the best time to operate either enter or exit (buy or sell).
2. What Are The Different Types of Moving Average? Differentiate Between Them.
There are different types of moving averages, here I will explain three types that are the most effective and used, which we saw in class, here are the three most effective types of moving averages:
- Simple Moving Average (SMA):
Simple moving average (SMA) is a type of the moving average indicator, through this type we will be able to perform calculations of the price of an asset taking into account the data, this data will be reflected in a line within the chart. This line will have changes according to the appearance of the candles, or trend changes.
To perform this calculation with this indicator (SMA) on the chart of the platform that we have selected, it will use the data of the closing asset price that occurs within a given or selected period of time.
- Exponential Moving Average (EMA):
Exponential moving average (EMA) is a type of indicator that we can use in the short term, because it uses more difficult calculations that will focus more on the current or recent actions or changes in the price of an asset. For this reason this method will be more accurate and with a higher percentage of correct price predictions.
I want to emphasize that for better and greater accuracy we must use SMA and EMA in combination, this will give us better results in the short and long term, in terms of reversals or price fluctuations of the market trend and thus be able to predict what trends will happen and operate (buy or sell) enter or exit.
- Weighted Moving Average (WMA):
The weighted moving average is also a type of moving average indicator that will help us determine which direction a market trend is heading.
WMA will produce signals that indicate a greater focus or weight on current or recent data and less focus on past data, this also means that it is more focused on the closing price data of an asset. WMA goes a step further than SMA, because WMA has the most accurate prediction, while SMA will only determine the movements of the asset when it assigns identical weights to all the numbers that are in a data set.
WMA performs this calculation by multiplying a weighted factor by the price of each bar and then summing the resulting values. This helps traders to identify trends and thus smooth and filter out market noise.
With the types of moving average defined, I will show a comparative table where we will observe the differences that each moving average indicator has.
| SMA | EMA | WMA |
|---|---|---|
| It performs the calculation with the closing price data of a period. | For the EMA calculation, it uses the most recent prices. | This calculation is made by multiplying a weighted factor by the price of each bar and then adding the resulting values, this is the calculation of the last periods. |
| The speed of this indicator is low. | The speed of this type of indicator is high. | Its speed is average. |
| It helps to predict long-term trends. | Here the predictions and operations are short term. | This one we use for medium-term forecasts and operations. |
| This one with a higher value will be safer and more reliable. | If it has a lower value, it will be more reliable. | With higher values and lower values, it will be more reliable. |
3. Identify Entry and Exit Points Using Moving Average. (Demonstrate with Screenshots)
In identifying entry and exit points, using the moving average, I will use two types of moving averages, the simple moving average SMA and the exponential moving average EMA.
How am I going to use these moving averages?
First I will apply for SMA as 100 periods, and for EMA as 20 periods. Knowing that SMA will give us as a result the identification of the current direction that the trend will take in the market, and EMA will help us to identify in a simpler way the entry and exit points that we should take in the market.
In the case of an uptrend we observe how the trade will be above 100 SMA, taking as support 20 EMA, we know that the price will not advance directly and will make a small correction and then take the direction moving towards the uptrend. Here will present our opportunity for entry (purchase), in the falls or lows in the movement of the asset.
Screenshot of Tradingview
We observe in the previous image, how we identify our entry point (buy), as I explained when the trade is above 100 SMA, and the support 20 EMA, then we take advantage of the falls where is our opportunity to buy.
We place the stop loss below 100 SMA, but what can happen if the trend direction goes down breaking the price action, it is advisable to exit (sell) because the trend will be bearish. At this time it will be below 100 SMA and will take as resistance 20 EMA, this is the signal to exit (sell).
Screenshot of Tradingview
Looking at the above image, we notice that the price is moving in the direction below 100 SMA is a downtrend, as I mentioned above will take as resistance 20 EMA.
As a recommendation we should not take a position quickly, we must be patient and calm to make decisions of the entry and exit points of the operation in the market.
4. What do you understand by Crossover? Explain in Your Own Words.
The moving average crossover is a strategy that involves the combination of two moving averages, one short and one long where they change positions and also cross each other to trigger an entry or exit signal to the market. This technique follows the trends in the market.
Also this combination of two moving averages is one of a slow and fast moving average of the trend movements. The fast one will of course react to the asset price faster because it will take a few data points to calculate, but the slower moving one will react slower because it needs more data points to calculate for more time or more days.
We can identify an entry (buy) position when the faster moving average passes or crosses above the slower moving average, this is a signal that there will be a change in trend.
It is almost the same when the faster moving one crosses below the slower moving one, this will signal an exit (sell) position.
In the following image below, we will observe the combination of two moving averages, a fast moving average 20 EMA exponential moving average and a slow moving SMA.
Let's look at the crossover there is of the EMA moving average which is the faster moving average passing over the SMA which is the slower moving average, this crossover signals a change from a downtrend to an uptrend. It also helps us to identify an entry opportunity (buy) and this is then a breakout candle where we place a stop loss below the SMA.
Screenshot of Tradingview
5. Explain The Limitations of Moving Average.
Before entering (buying or selling) an operation taking into account that the moving average is an indicator that only gives us predictions or assumptions that are not 100% certain, for this reason when deciding to operate based on these assumptions we must do it very carefully, since the moving average has its limitations.
Below are some of the limitations that we must take into consideration if we decide to trade based on the assumptions generated by the moving average.
If we do not know how to execute the moving average correctly or we do not know how to select the periods correctly, it can generate false signals.
It is very likely that we will miss some of the good opportunities, because the moving average does not act according to the actual asset price movements that occur in the market.
When we use the moving average, it can give us a false or inaccurate prediction or forecast, because not using an unadjusted moving average will give us those results.
The moving average produces signals to inform a trader about the changes of the trend directions in the market that unfortunately will be received many times too late, so the moving average is a lagging indicator.
When using the moving average consider that we will be making decisions under our own responsibility, for this reason we must operate with care and taking into account that this indicator does not generate totally accurate results or signals.
Conclusion
Understand that the moving average is a very useful indicator for trading in the crypto market, it is also important to understand that this indicator is best used in conjunction and also understand that it has its limitations.
In the moving average there are different types of moving averages, one for short, medium and long term, but previously I focus my task on the three most used types of moving averages which are SMA, EMA and WMA, these improve in different ways the predictions of the direction that the trend will take, we must use the one that fits our need and keep in mind that to employ any method is under our responsibility the decisions we make.
Having said the above and to finish, knowing the limitations, with practice and performing in the most correct and adjusted way we should use the moving average, and thus expand more the percentage of gains and minimize losses.